Capital Requirements Directive - Frequently
Asked Questions –

The proposals to change the banking rules may be useful for
strengthening market confidence and institutional resilience in more stable
periods. However, the proposed measures will come into effect in about two
year's time and will be way too late to have any impact on the current meltdown
of the financial system.

The legislative process is such that it is not possible for the Commission's
proposals to solve the current meltdown. The proposals are intended to
strengthen the framework going forward. In terms of immediate reaction and
problem fixing European institutions, the ECB and Member States have responded
promptly to the problems that have come about, be they liquidity or solvency.

So there are two responses, for the short term Member States or Groups of
Member States will continue to respond on structural issues and the Central
Banks will continue to address the liquidity problems. For the medium term, the
Commission will continue to strengthen the regulatory framework to prevent the
recurrence of such crises. These practicalities come directly from the Treaty
and as the events of recent days have shown, the provisions in the Treaty
work.

Large Exposures

Restricting inter bank lending in times of a liquidity crunch appears
counter intuitive. Is it right to be tightening the rules in such
times?

As we have all realised, banks are not risk free. It is thus imperative that
we restrict the exposures that banks incur to other banks.

The Commission believes that large exposures need to be actively managed. It
has, however, taken an approach that does not unduly curtail the funding and
investment operations of certain types of institutions such as smaller banks,
co-operative banks, savings banks and certain clearing and settlement
exposures.

For smaller and less sophisticated institutions you suggest a limit of
EUR 150 million. Is there any basis for such a limit?

The feedback provided in the context of the public consultation revealed that
the 'smaller' institutions might experience difficulties in finding a sufficient
number of counterparties (to diversify) or to find appropriate collateral to
secure their exposures (to collateralise). The amount of EUR 150 million
reflects a level that would alleviate the concerns of smaller institutions.

Home Host

Although there seems to be broad support for colleges of supervisors,
it appears that certain decisions have been shifted to consolidating
supervisors.

It is broadly acknowledged that colleges are a big step forward in including
branches and subsidiaries into the supervisory consultative and decision making
processes and that the raison d'être of colleges is co-operation. So, on
the one hand, hosts will be far more involved through colleges in receiving
information and being involved in group-wide decisions. But this has to be
counter balanced with some decisive capabilities. If for whatever reason this
co-operation does not prove effective or efficient, a last resort decision
making power on certain key decisions is imperative.

The CRD amendment does not introduce a 'group support' regime as in
Solvency II (in the insurance sector).

The Solvency II proposal and the CRD are built on different business models.
Banking is predicated on leveraging i.e. depending on the capital held in the
legal entity a certain amount of risk weighted assets can be held. It is thus
imperative that for assets held within a member state there is adequate capital
within that same member state. Any commitment to provide capital (along the
lines of contingent capital in Group support) would not form an appropriate base
to lend at many times the capital base. There has to be real paid up capital in
the entity and in the Member State that is carrying out the lending.

Insurance entities are not predicated on leverage and to a large extent are
financed by the premiums received through a calculation of technical provisions.
The assets side of an insurance company is in investments and not in loans that
leverage a capital base[1].

Securitisation (originate to distribute)

The requirement to retain 5% is an inappropriate response for a segment
of the market where there is now very little or no activity; such a proposal
would send a wrong signal to financial markets in that it will imply that
innovation is discouraged.

We recognise the importance of securitisation in financial
markets. Those markets are currently closed not because of this 5 per cent rule
or pending rule but because of mistrust in the market and the rating process. We
need to rebuild that trust. And one of the ways to help rebuild that trust is to
let market participants have the comfort that in respect of future
securitizations those who originate the underlying assets for securitization
pools retain a share of the risk. It is important to inject rigour into these
markets to instil confidence amongst investors so that these markets can grow
again in a safe and sound manner.

Does this imply that you are going to make getting a mortgage even more
difficult for the man on the street?

On the contrary what has made it more difficult for the man in the street to
get a mortgage recently is that banks have faced such serious losses as a result
of poor underwriting, careless ratings, and opaque securitization. It is
important that there is adequate due diligence and rigour right through the
system.

The failure of some institutions in recent times has shown that a deficient
management of risks is detrimental both to the institution and the broader
society. It is also important that a potential mortgage seeker is realistic and
prudent in the financial engagement he assumes. Lending standards had loosened
too much. It is inevitable that with what has happened they will tighten again
Member States as lenders are inevitably looking for more quality when signing
up new business. But for the medium to longer term- and this proposal is for the
medium to longer term I want to ensure that the right incentives and due
diligence is in place to support responsible lending and the return of an
orderly and competitive mortgage market. This proposal will in my view help
that.

Hybrid Capital Instruments

It is strange that you are bringing about changes at a time of capital
scarcity, especially when certain institutions depend on their capital needs for
certain types of instruments. Is this wise?

Our proposal precisely addresses the capital needs of institutions. By
appropriate 'grandfathering provisions' we will ensure that there is no
disruption in the markets. However, what is important is that institutions are
able to raise good quality capital by responding to the investments profiles and
needs of the investors. It is also critical that the types of instruments in the
EU are qualitatively similar throughout all member states.

Deposit Guarantee Schemes (DGS)

How safe are our deposits?

All deposits in EU banks are covered for at least €20,000. This is
enshrined in EU law[2]. A
number of Member States cover deposits for even higher amounts.

More importantly, EU Governments have acted rapidly and decisively in
stabilising distressed banks over the past few days. Their prompt intervention
is evidence that the protection of depositors remains of paramount concern.

Notwithstanding, in order to bolster depositors' confidence, the Commission
is planning further improvements, especially with regard to the speed of payouts
and levels of coverage.

Are the planned improvements that you refer to in this CRD
proposal?

The CRD proposal addresses financial stability and the institutions
themselves and does not deal directly with Deposit Guarantee Schemes.

While amendments related to the stability of banks are addressed in the CRD
the Depositor interests will be further strengthened by amendments to the DGS
Directive.

[1] Notwithstanding, for an
operational entity, Solvency II proposes a Minimum Capital Ratio (MCR) at the
entity level. This amount is less than the Solvency Capital Ratio (SCR).
Although MCR has to be paid up, the difference between the MCR and the SCR can
be covered by a Group commitment or what may be referred to as Contingent
Capital.